During the divorce process, the financial state of the marital couple is under a microscope, with both parties and their respective attorneys vying for their own interests. Each spouse is eager to protect their financial future, and with that desire, they have to remain vigilant when sorting through the various accounts and assets.
If a married couple was active in their financial planning and invested their money, understanding the ramifications of splitting these accounts and assets is beneficial to one’s financial future. One of the more common investments that need to be checked out during the process is a certificate of deposit (CD).
Figuring out CDs
Certificates of deposit (CD) are low-risk and relatively low-return investments that use cash that you do not need for months or years, according to the Wall Street Journal. The money used to invest in a CD is left alone during the duration, and the bank will pay an interest rate slightly higher than what you would have earned in a money market or a checking account. The higher interest rate is due to the fact that the banks require a commitment to leave the money on deposit for the fixed period of time, according to the Cornell Law School.
CDs also are taxed as income, unless they are in a tax-deferred (IRA) account or a tax-free (Roth IRA) account. Despite their effects on taxes, their status as marital property is another story entirely.
CDs as an asset
The CDs status as marital property is dependent on when the CD was opened and what funds were used to open it, according to the Institute for Divorce Financial Analysts. If one spouse heads into the marriage with a CD, it is considered a separate account that does not comingle with marital property. However, the interest on that CD would be considered marital property and subject to the asset division rules of the state. This was decided in the Court of Appeals during Mercer v. Mercer.
Once the CD is opened, the money becomes subject to what can be fought over. However, that duration is subject to the fixed period of time that is committed to, which may require a reopening of the asset division at a later date. This is similar to the discovery of an asset long after the divorce decree is finalized, where a partial claim can be made.
Unforeseen life circumstances
In the cases where an individual heads into the marriage with a preexisting CD and divorces, it is important to understand who is listed as the beneficiary of the CD. Many times, new spouses are named as beneficiaries of many important legal and financial documents, giving themselves legal footing later on in cases of divorce.
Even if they may have a claim when it opens later down the road, that would require both parties being around to fight for it. Depending on the duration agreed upon, unforeseen life events could create unintended consequences if the beneficiary is not changed after a divorce, according to The Huffington Post.
Unforeseen life events, such as death or a vegetative condition, can leave your assets vulnerable, especially if the beneficiary to many of your financial documentation has not been modified after your divorce. This can leave your ex-spouse with legal claim on these assets. If you want to protect your asset in the event of any unforeseen circumstance from your ex-spouse, it is vital that you name another beneficiary.
The amounts left in CDs are worth keeping an eye on, especially when going through the divorce process. Even if the duration that the funds are committed to has not passed, keeping documentation related to the account is being actively vigilant to making sure that your financial future is protected, regardless of your marital status.